Spatial Trends in Employment in Foreign Firms in Ireland

In a country with a small domestic market such as Ireland’s, the development of exports is the key to achieving high living standards. The Irish government has relied principally on inward investment by foreign firms as the principal means of achieving this since the late 1950s. Generous capital grants, tax incentives and the availability of suitable labour have been the principal means employed to attract inward investment. This policy met with increasing success through the 1960s followed by a surge of investment following Ireland’s accession to what was then called the European Economic Community (EEC) in 1973, as this meant that foreign firms could use Ireland as a low-cost base for serving the large EEC market. This was followed by a slowdown during most of the recessionary 1980s, during which many of the plants established in the previous two decades contracted or closed. However, things picked up again in the late 1980s and, following a brief dip in the early 1990s, a further surge of inward investment commenced in 1993 which underpinned the “Celtic Tiger” phenomenon and saw employment in foreign firms increase by two thirds (to 164,000) by 2000. The great bulk of this new investment came from the USA which by 2000 accounted for two thirds of all employment in foreign firms operating in Ireland. In the period 2000-2010, while the reported exports of foreign firms based in Ireland continued to grow strongly (by 56% in current prices), there was a sharp fall (of 22%) in employment. Furthermore, the spin-off effects of foreign firms also contracted: expenditure by foreign firms on wages/salaries, materials and services fell by 18% (in current terms) over the period. This apparent conflict between trends in exports, on the one hand, and employment and local expenditures, on the other, is an indication of the extent to which the Irish output data for foreign firms are being distorted by transfer price manipulation on the part of the firms in question in order to exploit Ireland’s tax advantages. Over the last thirty years the IDA became increasingly selective in the types of investment it sought to attract to Ireland, focusing on sectors with long-term growth prospects for which an Irish location was suitable. In manufacturing, the main concentrations in the 1990s were in electronics (mainly office and computing machinery) and chemicals/pharmaceuticals. However, a more significant development was the rapid rise in investment in services activities capable of using information technology for conducting international transactions, especially software/computer services, financial services (whose growth primarily emanated from the establishment of the International Financial Services Centre in Dublin in 1987) and business services (especially back-office activities). By 2000, employment in foreign-owned services operations amounted to 46,000, 28% of all foreign-firm employment. In the 2000s the electronics sector was heavily affected by, firstly, the dot.com crash in the early part of the decade and, secondly, by the emergence of China as a major global competitor in this sector. Foreign employment in the sector fell by one half between 2000-2010. Non-electronics manufacturing employment fell by 25%, but losses in chemicals/pharmaceuticals were at a much lower level (8%) while the medical devices sector did well over the decade. Employment in international services actually increased marginally over the period, so that its share of total employment in foreign firms rose to 36